The board of Aer Lingus is expected to recommend a €1.34bn cash bid from IAG, setting the stage for a public debate over the Irish government’s 25 per cent stake in the nation’s flag carrier.

The €2.50 a share cash takeover approach by IAG, owner of British Airways and Spain’s Iberia, marks its third bid in just over a month. Two earlier offers of €2.30 and €2.40 a share were rejected by Aer Lingus. People familiar with the matter said that the two sides could announce the start of formal talks to finalise a deal in the next few days, but warned that the situation remained fluid. IAG and Aer Lingus declined to comment.

The deal has been cast as an opportunity for Aer Lingus to join forces with the larger operator at a time when many flagship airlines have struggled to compete globally. Profits for European airlines in particular have been squeezed by both low-cost carriers and government-subsidised long-haul operators from the Middle East.

The latest offer could face opposition from the Irish government, which owns a 25.1 per cent stake in Aer Lingus. Rival Ryanair, the low-cost airline with a 29.9 per cent stake in Aer Lingus, would also have to be persuaded by the deal. Opposition transport spokesman Timmy Dooley urged the government not to sell its stake, saying that an IAG takeover could have a significant impact on Dublin, Cork and Shannon airports. “Dumping this stock in order to raise some short-term cash to fund election promises would be a major mistake that the travelling public will quickly regret,” he said.

Dublin, in particular, has seen its status as a regional hub climb in recent years and flights between London and Dublin rank as one of the most frequent routes in Europe. Aer Lingus has a lucrative niche on transatlantic routes, offering customs and immigration clearance in Dublin and Shannon for flights to the US. These hubs also benefit from shorter flight times to the US than London.

IAG is interested in freeing up capacity in an already overcrowded Heathrow by transferring some of its regional passengers from the UK through the Dublin and Shannon hubs. It has tried to assure Aer Lingus that a deal would not affect connectivity and would bring the Irish airline into the BA-led Oneworld alliance.

Combined with Ireland’s geographical location on the periphery of Europe, Aer Lingus is much less attractive to other carriers but has been seen as a logical target for BA due to its main hub at Heathrow. The Irish carrier has the third-largest number of take-off and landing slots with 23 pairs at Heathrow, behind BA and Virgin. One analyst valued a pair of slots at €15m. In addition, Aer Lingus had net cash of about €381m in November.

Ryanair declined to comment. Last week Michael O’Leary, Ryanair chief executive, said there had been no approach and the Ryanair board would consider a bid if and when one was made.

In a sign of the political sensitivity surrounding the bid, members of the Irish parliament grilled the transport minister last week on how the government intended to protect routes between Ireland and London’s Heathrow. ENDS

Beyond the commentary about the bid, interesting to note the reference in the FT to “government-subsidised long-haul operators from the Middle East….”

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